Viewpoint: A Tale of Two Gen Ys that Desire Prepaid Cards (February 2013)(2)

By Aleia Van Dyke, Javelin Strategy & Research

The slow economic recovery from the Great Recession has forced young Americans to confront a dismal financial reality marked by unprecedented student loan debt and soaring unemployment. But the financial industry cannot afford to ignore Gen Y, the generation of consumers born from 1979 to 1999. By 2025, Gen Y will account for 46 percent of the nation’s income and will represent 73 million consumers, making them a critically important consumer segment for financial institutions (FIs), payment vendors and card networks. 

But today’s young adults are hardly a monolithic generation. This group is made up of two distinct age segments that act in significantly different ways—Y.1 (18- to 24-year-olds) and Y.2 (25- to 34-year-olds), according to Javelin Strategy & Research’s latest research study A Tale of Two Gen Y’s: On the Road to Long-Term Banking Profitability. 

Fig. 1: Y.1 and Y.2 Represent more than 73 Million Adults

Surprise: Y.2s Use Branches

Of immediate interest is the “Y.2” group, comprised of hyper-vigilant account managers and penny pinchers. Like previous generations of young adults, Y.2 consumers are in the stage of life when they begin to establish financial independence, build banking relationships and develop personal finance management (PFM) behaviors. What sets these Y.2 consumers apart from previous generations is that they were raised in a digital world and yet they are coming into financial maturity in an era where disposable income can be more mythical than fabled creatures.

Y.2 consumers are more likely to use online and mobile banking than all consumers, but a significant proportion of these young consumers still prefer person-to-person contact for their financial needs. Surprisingly, 25 percent of Y.2 consumers prefer to conduct everyday transactions (checking balances, transferring money, etc.) in-person at bank branches, a rate that is 2.5 times greater than that for consumers over 65 years old. While there are a number of factors that contribute to Y.2’s propensity for bank branches, a key reason may be due simply to the necessity of timely deposits. Those underemployed Y.2 consumers who live paycheck to paycheck oftentimes will not have the luxury of having a job that uses direct deposit. FIs will regularly place a temporary hold on checks that are deposited through an ATM and will release only a limited portion of the funds until the check has officially cleared, sometimes up to 11 days after the check has been deposited. Visiting a branch to deposit can help ensure that the check is swiftly deposited and that the funds are more readily available. 

As would be expected of a financially immature population, ownership of financial products and accounts for Gen Y is lower than that of Gen X or baby boomers. One-fourth of Y.2 and a slightly higher percentage of Y.1 are considered underbanked, meaning that they don’t have a checking account. Instead, they rely on prepaid cards and other payment options like cash. Notably, nearly one in five (19 percent) Y.2 consumers own a prepaid card, greater than any other age segment and nearly twice that of Y.1 consumers. Y.2’s attraction to prepaid cards once again points to the frugal and cautious nature of these consumers.

Fig. 2: Y.2 Increasing Ownership of Financial Products Compared to Y.1

Ownership of almost all financial accounts and products—including checking accounts, credit cards, retirement accounts, prepaid cards, loans and mortgages—noticeably increases between Y.1 and Y.2 segments, signaling that Y.1 will quickly become a desirable group as they age. Banks should market prepaid cards to the financially developing Y.1 consumers in an effort to build the foundation for long-term customer relationships. The “pay before” nature of the prepaid card makes it impossible for consumers to spend money that is not in their accounts.  We’ve seen an increasing number of FIs beginning to offer their own prepaid products that often serve as a metaphorical stepping stone for more advanced banking products down the line. These prepaid cards often come with online and mobile account management capabilities and can help establish positive long-term banking behaviors.

Frugal and Fickle

Gen Y consumers differ from their elders not only in financial maturity but also in brand—and bank—loyalty. One out of four Y.2 consumers has switched banks in the past two years, significantly higher than the rate for all consumers. Furthermore, both Y.1 and Y.2 indicate that they are far more open to using PFM products from third-party providers than all consumers, suggesting that Gen Y consumers are surveying the competition to determine which products are best. This is good news for prepaid vendors such as Green Dot, NetSpend, and Plastyc, as it means that the long-standing trust advantage that traditional banks have held may be weakened with young consumers. Prepaid providers—both third-party vendors and issuing banks—must woo Gen Y loyalty with inventive and useful prepaid features. Offering prepaid cards with advanced electronic account‐management capabilities—particularly mobile—is a simple way to encourage deeper relationships with young prepaid cardholders.

More innovative prepaid features, such as tools designed to help users establish a credit history, make P2P transfers or use geolocation to help redeem rewards offers, can help build loyalty from Y.1 and will encourage long‐term profitability from this young segment that will put particular value on PFM capabilities such as:

• Cash‐flow analysis that reduces the likelihood they will overdraw accounts.Mobile alerts that warn when they are at risk of making financial goofs, such as exceeding a credit card limit. Mobile ATM finders that steer them to fee‐free ATMs.
• Automatic spending categorization that will enable young customers to see at a glance where their money is going.
• Prepaid cards that make it easy to monitor account balances on the go and provide a linked savings account for rainy‐day emergencies.

Looking forward, we will begin to see more prepaid cards come to market with advanced features that leverage emerging technology to meet consumers’ needs. For example, prepaid vendors can alleviate young consumers’ desire for bank branches by offering mobile remote deposit services to their customers. A new service from Visa and Chexar Networks will enable prepaid cardholders—including cards offered by RushCard, AccountNow and Plastyc—to make deposits by taking a picture of their checks with their mobile phones. While this doesn’t quite solve the problem of timely deposits (unless customers opt to pay for immediate funds availability) it is a step in the right direction for prepaid cardholders and is another way issuers can increase the stickiness of their cards.

Javelin’s Y.1 and Y.2 research underscores that the success of any financial offering will be shaped largely by a provider’s ability to provide satisfying online- and mobile-centric banking access, personal finance management control and insight, helpful financial alerts, and the practicality of paying bills and moving money to accounts and friends—all within a simple, intuitive user experience. Y.2 consumers have higher expectations than older Americans and they are serving warning that they’re more willing to turn to non-traditional sources, such as merchants, online and mobile innovators, and mobile carriers for personal finance capabilities.

For more information on the Gen Y consumer segment, join Javelin Strategy & Research at the upcoming CARTES America conference in Las Vegas, April 23-25.

Aleia Van Dyke is a payments analyst for Javelin Strategy & Research, providing strategic insights into customer transactions for the global financial services industry.  In addition to tracking consumers’ payments behavior, Van Dyke focuses on emerging payments vehicles, including prepaid cards, gift cards and future payment methods such as virtual currency and social networking payments. She can be reached at [email protected].

In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. If you’re interested in contributing to Viewpoints, contact Loraine DeBonis.